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Interest rate commentary for 13 Mar – 17 Mar 2017

There’s an old saying in share markets; “buy on rumour, sell on fact”. We witnessed a variation of this saying this week. The focus was on the US Fed’s FOMC decision on Wednesday (AEST). It wasn’t the only central bank to have a monetary policy meeting this week; the Bank of Japan, the Bank of England, the Swiss and Norwegian central banks all met (and did nothing) but it was the US central bank which held everyone’s attention.

CHART OF THE WEEK

It’s interesting to see the Government can also influence housing activity through other levers such as APRA’s speed limit on property investment lending. While property investors may not agree, having this lever gives the RBA the ability to maintain rates lower for longer, in the knowledge that APRA can do some of the heavy lifting in a more focused fashion.

chart of the weekhome
Close △Week Week
High
Week
Low
Cash Rate%   1.50
90day Bank Bill% 1.80  0.01 1.80 1.79
Aust 3y Bond%* 2.08 -0.09 2.19 2.03
Aust 10y Bond%* 2.91 -0.11 3.01 2.83
Aust 20y Bond%* 3.44 -0.13 3.55 3.41
US 2y Bond%   1.32  -0.03  1.38  1.29
US 10y Bond% 2.50 -0.08 2.63 2.49
US 30y Bond% 3.11 -0.05 3.21 3.11
iTraxx 79.5 -5.37 84.3 79.5
$1AUD/US¢ 77.05  1.64 77.19 75.34
* Implied yields from June 2017 futures

All the boxes were ticked for a rate rise. Non-farm payroll numbers were better than expected, there was no excessive market volatility, Yellen was in favour, most FOMC members were in favour, markets were in favour and US cash futures’ pricing implied a 90% plus probability of a March increase.

So the FOMC raised its official rate, formally known as the federal funds rate, by 25bps. The market got what was expected and nothing more. There was some disagreement about the statement from the FOMC meeting; was it dovish because the pace of rate increases was still going to be gradual or was there a hint of some hawkishness tucked away in the dot-plots? More rises are expected this year, next year and the year after, subject to an absence of disappointing data, market volatility or anything else which has deferred monetary policy normalisation in the past but in any case bond yields fell around the globe.

Australian cash markets do not expect much to happen in 2017. Even though Australia is inching towards the rate-rising part of the cycle there is some doubt regarding Australia’s economic position and a higher rate is only fully factored in once another eighteen months has passed.

Term deposit rates were largely unchanged, although there were a couple of institutions which changed their rates (not in a direction favourable for savers). See our term deposit tables for a comparison of various rates from over forty institutions.

ASX-listed notes and ASX-listed hybrids median trading margins were slightly lower, as with almost everything else. Crown Resorts continues to be in the news.

The corporate bond market is acting a little confused at the moment. Measurements of risk in this segment of the bond market are not really behaving consistently but the movements are small.

The semi-government market quietened down but QTC has been quite active in recent weeks and it was at it again in the primary market, this time with a new green bond.

We hope you enjoy reading this week’s YieldReport.

February 2017 monthly interest rate commentary

Global bond markets have had several themes with which to deal and Australian yields have largely followed the herd. The Trump reflation scenario is in doubt as markets develop an “Are we there yet?” attitude even as President Trump held out the promise of a “phenomenal” change to US tax laws but as yet nothing concrete has emerged. Yields rose late in 2016 in anticipation of growth-oriented policies but the waiting has proved difficult and the world has renewed its interest in bond yields, whereas a month ago the “Trump reflation” scenario had dominated. There is also the increasing appearance of the term.…Click here to read more

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